Not Sold on This Shopping Mall Operator

Horizon Kinetics has reported a position of 8.1 million shares in Rouse Properties (RSE), which represents ownership of over 16% of the total shares outstanding. Our database of 13F filings shows that the fund had owned 3.3 million shares at the end of September, after having doubled the size of its position in the previous three months. The continued increases would indicate that the investment team remains bullish, even though the stock price has risen 27% since the beginning of October.

Rouse is a $910 million market-cap property management company that owns and manages 30 shopping malls in the U.S., operating as a real estate investment trust. It was spun out from General Growth Properties (GGP) in early 2012. Horizon Kinetics is managed by Murray Stahl.

Unlike many real estate investment trusts, Rouse pays a modest dividend, yielding 1.5% as of the most recent dividend payment and prices. REITs often pay high yields because the company structure requires them to pay out a high share of income to shareholders in order to preserve their favorable tax status. A 1.5% yield is not high enough to attract income investors, and it's not much of a sweetener from a value perspective.

Real estate investment trusts are generally not analyzed in terms of their earnings. This is partly because some expenses are not as applicable to these businesses. For example, it is often appropriate to add back depreciation, since the value of real estate does not necessarily decrease with use as the asset values of equipment do. In fact, real estate may even appreciate over time.

While Rouse has been recording net losses, the company provides a reconciliation that shows that funds from operations (FFO), which is generally considered an appropriate "bottom line" for REITs, was positive in the third quarter of 2012. This was an improvement from the first half of the year, and this could be taken as a positive sign -- that FFO is increasing on a quarter-over-quarter basis -- or a negative sign, in that the third quarter may have been unusually high. We'd also note that even in the third quarter of 2012, FFO was down from a year earlier.

Rouse also provides its investors with "core FFO," which adds back some additional expenses and which investors may or may not find appropriate. The company reported $15 million in core FFO in the third quarter of 2012, down from $21 million in the third quarter of 2011; using core FFO improves the picture in the first half of the year. Finally, Rouse reports that its financials do follow a seasonal pattern of the fourth quarter of the year showing the highest revenue, so investors should be careful not to annualize these quarterly figures without taking that into account.

Horizon Kinetics has significant opposition in its bullishness in Rouse; the most recent data show that 20% of the outstanding shares are held short, even after -- or perhaps because of -- the recent run-up in the share price. The yield is certainly not impressive. While mall operators do not have the highest dividend yields, particularly among REITs, they are generally above 2% (as is the case with General Growth Properties and Simon Property Group (SPG), for example) and can be near 4% at some similar companies. We are also wary of the trends in FFO, and we are skeptical that Rouse has any particular advantages over other shopping mall owners. Macro conditions should benefit or harm most shopping centers at a fairly similar rate.

This is a buy that we don't believe investors should follow. Perhaps you might use it as a data point that Horizon Kinetics believes that the shopping mall industry will do well in 2013. More research on property managers could then lead to finding better values or better income stocks.